Recent decisions issued by the National Labor Relations Board (NLRB) and the U.S. Supreme Court have caused employers some concern and may require a review of your organization’s current practices.
Specifically, the NLRB issued an order on February 21, 2023, in which it broadly rejected confidentiality and non-disparagement provisions in employment severance agreements, and the U.S. Supreme Court issued a consequential interpretation of the Fair Labor Standards Act (“FLSA”) in which the Court determined an employee making $200,000 per year in base compensation was entitled to overtime as a non-exempt employee.
NLRB Order – McLaren Macomb
The National Labor Relations Act (“NLRA” or the “Act”) affords workers significant protections when it comes to complaints of or participation in matters concerning an employer’s labor practices, such as wages, break and mealtimes, and union relations. Section 7 of the NLRA entitles employees to make statements regarding their employers’ labor practices with protection against an employer’s retaliation related to such statements. Importantly, while the NLRA is largely focused on protecting unionized employees and workforces, Sections 7 and 8 of the Act applies to all employees, whether they belong to a union or not, unless they are considered managers or supervisors under the Act.
In McLaren Macomb, an employee was promised a severance payment in exchange for execution of a severance agreement which contained, among other provisions, confidentiality and non-disparagement provisions, as well as remedies to the employer for any breach by the employee of the agreement, including claw back of the severance payment. The NLRB first determined that the confidentiality and non-disclosure provisions of the agreement were overbroad so as to limit the protections of Section 7 of the NLRA, which prohibits an employer’s interference, restraint, or coercion over an employee’s claims regarding labor practices. Indeed, in overturning NLRB precedent on the same matter, the Board stated that the “broad scope” of Section 7 must be read to provide wide protection in favor of employees, and that prohibiting an employee from discussing “the workplace” in exchange for a payment of severance (and at risk of further legal action and claw back of the payment in the event of a breach) constitutes such interference, restraint, or coercion over the employee’s complaint rights.
Further, the NLRB held that non-disparagement provisions prohibiting employees from making any disparaging or damaging statements against their employer, even in exchange for a severance payment, had the same chilling effect over their Section 7 rights. To clarify, the Board made sure to note that the NLRA’s protections applied to all employees—including former employees—thus, even if not actively employed at the time of the agreement or consideration, these provisions would still invalidate a severance agreement.
The confidentiality and non-disparagement provisions at issue in McLaren Macomb are widely used in employment and separation agreements, often as a matter of course, by employers. Although the NLRB decision is not binding on any court, employees can bring complaints against employers to the NLRB. As such, employers should revise any such agreements to comport with Section 7 and Section 8(a)(1) of the NLRA.
SCOTUS – Helix Energy Solutions v. Hewitt
The U.S. Supreme Court published its opinion in Helix Energy Solutions Group, Inc. v. Hewitt, on February 22, 2023. In its decision, the Court clarified important portions of the FLSA and the threshold standards for meeting the “bona fide executive” exemption. The Court held that to qualify for this exemption, an employee must satisfy the salary basis requirements applicable to employees who are both considered “highly compensated” and who do not make enough annual compensation to meet the threshold.
The plaintiff in Hewitt was an offshore oil rig worker who frequently worked well above 40 hours per week. The plaintiff was paid a daily rate, which was due to him only for the days in which he actually worked. Although the plaintiff received a regular paycheck once every two weeks, this paycheck varied depending on how many days per pay period he worked. The plaintiff made more than $200,000 per year based on his daily rate alone. The defendant company classified Mr. Hewitt as an exempt employee under the “bona fide executive” exemption. The company alleged that Mr. Hewitt supervised employees, directed the employer’s operations with respect to his team, and made well over the minimum compensation threshold applicable to the executive exemption.
Employees properly classified as “exempt” under the FLSA are not entitled to overtime. Exempt employees include administrative, professional, or executive employees, with regulations outlining the requirements of each. The “bona fide executive” standard has been established through, according to the Court, “two separate and slightly different rules, one ‘general rule’ applying to employees making less than $100,000 in annual compensation, and a different rule addressing ‘highly compensated employees’ (HCEs) who make at least $100,000 per year” pursuant to 29 CFR §§541.100, 541.601(a) and (b)(1).
On review, the Court was tasked with one singular determination: whether the plaintiff met the “salary basis” test of the bona fide executive exemption standard. The Court ruled that he did not, thus was non-exempt and entitled to overtime.
The Court observed that HCEs are subject to a slightly modified exemption duties test. In the case of HCEs who fit within the bona fide executive subcategory,[1] the employee must regularly perform at least one of the enumerated executive duties provided in the regulations, rather than all three. Bona fide executives who do not meet the HCE threshold must satisfy all of the executive duties in the regulations: (1) their primary job is management; (2) they regularly direct the work of others; and (3) they have authority to hire and fire. Both non-HCEs and HCEs must be paid the salary rate of $455/week and be compensated on a salary basis to be classified as exempt.
The salary rate threshold was easily satisfied in this case where the employee made well over $100,000 per year in compensation. Further, there was no dispute before the Court as to whether the employee was performing at least one of the executive duties under the FLSA. Thus, to be considered exempt, the employee had to be paid on a salary basis.
The salary basis test asks whether an employee is regularly paid the same weekly amount regardless of the hours or days worked in a given pay period. Employers also may establish this test by “guaranteeing” a minimum of $455 per week, thus a regular paycheck of at least the minimum salary threshold. However, where an employee’s compensation is computed on an hourly, daily, or shift basis, their compensation structure will not satisfy the salary basis test, and they will not be considered exempt. In Hewitt, the oil rig worker was paid a daily rate and was not guaranteed a minimum salary, nor did he receive pay even for days on which he did not perform any work. Although this particular employee ended up working nearly every day, the Court clarified that a handsome paycheck, alone, will not transform an otherwise non-exempt employee into a bona fide executive under the FLSA regulations.
Employers should always carefully consider exemption status when creating or revisiting roles and position descriptions in their workforce. Exemption status offers fertile ground for workers to bring claims against employers, and these claims can quickly gain widespread impact—where one worker proves they are misclassified, the evidence can often be applied to other similarly situated employees. As demonstrated by this case, a highly compensated employee is not sufficient for classification as an exempt employee and the courts will strictly interpret the “salary basis” test. Thus, it is imperative that employers be mindful of the strict salary basis requirements under the FLSA.
[1] While the Court was only concerned with the executive exemption in Hewitt, HCEs also can be those in administrative or professional positions. Those employees are subject to different duties as described in the relevant regulations.
What is written here is for general information only and should not be taken as legal advice. If legal advice is needed, please consult an attorney.